RISK ASSESSMENT

The economy recovers from a destructive earthquake

After being reduced by the decline in extractive activities following the destruction of several production sites during an earthquake in February 2018, growth is set to rebound in 2019. The economy should benefit from a return to normal in the extraction of hydrocarbons and minerals, an activity that constitutes approximately 30% of GDP. In addition, the oil price, which is likely to remain high, and rising gas prices are expected to stimulate growth in 2019. Exports, the main driver of growth, will benefit from the recovery of the hydrocarbon and minerals sector, which accounts for nearly 75% of exports. This sector will continue to profit from significant investment, particularly foreign investment, with many facilities under construction, notably in the field of liquefied natural gas (LNG).

Agriculture, which employs two thirds of the working population, occupies a limited place in the country's economy, generating only about 12% of GDP. The agricultural sector remains largely informal and unproductive, making subsistence farming prevalent. In addition, the economy will continue to suffer from the damage caused by the earthquake on the already under-developed infrastructure network.

Household consumption, which accounts for about half of GDP, will benefit from the gradual reduction in inflation. However, the level of the latter will remain significant, as it is fuelled by fiscal policy, with the public deficit partly financed by the regular issuance of treasury bills.

Further fiscal consolidation and stabilisation of the current surplus

Many efforts have been made by the government to reduce public spending as part of fiscal consolidation since 2017. These efforts are expected to continue, leading to a resumption of the decline in the public deficit in 2019, after a slight rebound in 2018 due to public spending on post-earthquake reconstruction. It is in this context that the government plans to limit wage developments in the public sector, for example. Measures have also been taken to improve the collection of tax revenues. The government should continue in this direction in 2019, notably with the establishment of new regional tax centres, the aim being to improve the efficiency of tax administration. The rebound in growth is also expected to generate higher budgetary revenues.

In 2019, the country will still have a large current account surplus. This is due to the strength of raw material exports, leading to a trade surplus, as well as by the receipt of international aid. These surpluses more than offset the deficits in the other components of the current account: services (linked to extractive activities) and income (linked to the presence of foreign investment). However, the current surplus is practically absorbed by the repayment to parent companies of loans contracted by their local subsidiaries for the construction of gas infrastructure.

A government that is a source of social tension

Prime Minister Peter O'Neill, a member of the People's National Congress, is serving his second term since his re-election in 2017. Accused of embezzlement of public funds and fraud during the 2017 parliamentary elections, his popularity continues to decrease. In June 2018, the Prime Minister declared a nine-month state of emergency in the Southern Highlands province, following riots organised by opposition supporters challenging the victory of the local government. The Prime Minister must also face challenges from citizens about the management of hydrocarbon exploitation on their land. These tensions are unlikely to ease in a country where poverty and inequality remain high. Moreover, additional tensions could result from the referendum on independence that should be held in the autonomous region of Bougainville in June 2019. Although the large majority of inhabitants seem to support independence for Bougainville (which is rich in copper reserves), the non-binding nature of the vote means the government could refuse to grant it regardless of the result.

On the regional scene, the government is maintaining increasingly close relations with China. In addition to importing LNG, China holds a quarter of Papua New Guinea's public debt through its import-export bank. In addition, given the trade tensions between China and the United States, the country's LNG could be partially used by China to replace that of the United States.

In 2017, Papua New Guinea ranked 146th out of 204 countries assessed in the World Bank's regulatory quality ranking, falling four places in a year. The business climate therefore remains marred, with a significant risk of late payments and project cancellations.